30 Important Central Bank Questions and Answers [Notes with PDF]

The 2nd chapter of our banking learning course is “Central Bank”. In this article, we’ll learn the 30 most important central Bank questions and their answers.

If you read every question and its answers carefully, you will be able to prepare for the banking course in a very good way.

You can read the first chapter of our banking learning course here if you missed it.

By reading this post, you may quickly prepare for any competitive tests such as school and college exams, vivas, job interviews, and so on.

So let get started…

Central Bank Questions and Answers:

The following are the 30 important Central Bank Questions and Answers:

Question 01: What is the Central bank?

Answer: The central bank is a government agency that manages the government’s key financial operations and, through those operations and other means, controls the behavior of financial institutions to support the government’s economic strategy.

For example, Bank of England (UK), Federal Reserve System of (USA), Reserve Bank of India (India), etc.

Question 02: What is the Scope of a Central Bank?

Answer: The scope of a central bank is as follows:

  1. Monopoly right of note issue
  2. Custodian of money standard
  3. Government Bank
  4. Guardian of the money market
  5. Banker and controller of other banks
  6. Controller of foreign exchange
  7. Lender of the last resort

Question 03: What are the 10 Important Features of a Central Bank?

Answer: The 10 important features of a central bank are as follows:

  1. Single organization
  2. Government Ownership and Control
  3. Difference in objectives
  4. Monopoly right of note issue
  5. Custodian of money standard
  6. Government bank
  7. Guardian of the money market
  8. Banker and controller of others bank
  9. Controller of foreign exchange
  10. Lender of the last resort

Question 04: What are the Objectives of the Central Bank?

Answer: The 10 important objectives of the Central Bank are as follows:

  1. Forming, monitoring, and controlling the money market.
  2. Planning and implementing economic policies to achieve economic prosperity.
  3. Circulates notes and currency, preserving the value of the currency.
  4. Employs various control mechanisms to maintain the foreign currency reserve and control the exchange rate.
  5. Maintains control over the value of the native currency to maintain a favourable trade balance.
  6. Organizing and improving the efficiency of scheduled and non-scheduled banks to operate as a banker for other banks.
  7. Provide commercial banks with services to resolve various exchanges and maintain coordination with commercial banks across the country.
  8. Provides policy and direction to commercial banks for them to make loans.
  9. The central bank provides guidance, prepares plans, and implements these to provide force in all economic development sectors, both domestic and international.
  10. Provide financial assistance, instructions, information, and advice to commercial banks so that they can efficiently provide loans in industrial and other sectors, allowing capital formation to take place.

Question 05: What are the Functions of the Central Bank?

Answer: The main functions of a central bank are as follows:

General Functions:

  1. The Central Bank is solely responsible for the circulation of money and currency.
  2. Serves as the Central Bank of the money market’s guardian and controller.
  3. Creates various forms of exchange like currency, bills, and hundi, among others.
  4. Taking charge of the credit. Different credit-control mechanisms include bank rate policy, open market operations, deposit rates, and so on.
  5. The central bank maintains the country’s currency value by increasing and lowering the money supply.
  6. Maintains the prestigious worth of the home currency by controlling the exchange rate.
  7. The central bank maintains price stability by controlling the money supply.
  8. Keep the required amount of foreign cash on hand.
  9. Responsible for the overall banking sector’s infrastructure development.
  10. Keep track of how government loans are used and repaid.

Functions as a government bank:

  1. During financial crises, the government borrows money from the central bank. As a result, this bank is a government funding source.
  2. Looks after the government’s money, assets, and documents.
  3. Keeps track of the government’s many accounts.
  4. Assists in the handling of government paperwork.
  5. Purchase and sell domestic and foreign money on behalf of the country’s central bank.
  6. Serves as a consultant by participating in the planning, policy development, and implementation.
  7. Gathers, coordinates, and stores various facts and statistical data to make decisions.
  8. As a government representative, conducts various activities in the home country and abroad.

Banker of the other banks:

  1. Assists in the approval and scheduling of new bank opening activities.
  2. Approves the opening of a new branch.
  3. Use a clearinghouse to resolve various interbank transactions.
  4. In times of financial crisis, when funds are in short supply, the central bank extends financial assistance. As a result, Central can be considered a lender of last resort.
  5. The activities of commercial banks are governed by the rules, regulations, and policies of the central bank.
  6. Examines the commercial banks’ accounts.
  7. Assists in the recovery of scheduled bank loans.

Other functions:

  1. Introduction of various methodologies, policies, and procedures for the development of trade and commerce this bank engages in extensive research.
  2. To verify that the floated loan is properly utilized.
  3. The establishment of agricultural and cooperative banks.

Question 06: What is the relationship between the Central Bank and Commercial Bank?

Answer: The Central Bank has the following relationship with the Commercial Bank from the standpoint of economic activity, particularly as a guardian of the money market:

  1. Commercial banks must maintain a statutory reserve of a certain percentage of their deposits with the central bank.
  2. The central bank provides clearinghouse services to commercial banks, resulting in a positive relationship between them.
  3. The central bank must receive weekly or monthly operating papers from commercial banks. The central bank provides guidance to the commercial bank by assessing the information in the working paper.
  4. The Central Bank collects information on the money market, the economy, and other banking-related topics worldwide. Every commercial bank has to maintain a specific portion of the total deposit as a liquid asset. The central bank always monitors the liquidity position of the commercial bank to protect the client’s interest.
  5. The Central Bank serves as the commercial bank’s guardian.
  6. The central bank lends to commercial banks.
  7. The scheduled bank receives advice, direction, and financial assistance from the central bank.
  8. The Central Bank’s plan and policies are carried out by commercial banks.

Question 07: Why is Central Bank called the Government Bank?

Answer: The central bank is called the government bank. The central bank is the countries only and unique banking institution owned and controlled by the government to lead the country’s banking and monetary system.

The owner, director, and regulator of this bank is the government. These banks transact money on behalf of the government, keep accounts, give necessary loans to the government and represent the government in various fields.

That is why the central bank is called the government bank.

Question 08: Why is the Central bank called the Banker of other Banks?

Answer: The central bank is the country’s only and unique banking institution owned and controlled by the government to lead the country’s banking and monetary system.

This bank acts as one of the listed banks. In the same way that people open banking accounts with commercial banks and receive banking services, the listed banks also open accounts with the central bank and avail banking facilities. That is why the central bank is called the Banker of other banks.

Question 09: Why is the Central Bank called the Last Resort of Lender?

Answer: The central bank is said to be a borrower’s last resort. When listed banks face a liquidity crisis and cannot raise the necessary funds from other sources, the central bank, as the country’s most responsible agency, steps in to provide loans to the banks.

If necessary, the government of the country seeks assistance from the central bank. Because of this, the central bank is referred to as the lender of last resort.

Question 10: Why is the Central Bank called the Guardian of Money Market?

Answer: The central bank is known as the money market’s guardian. The guardian of the money market is the organization in charge of forming, managing, and controlling the country’s money market.

The currency market is made up of banks, bill markets, and other financial institutions. Their proper development benefits the country’s economy. As a result, the central bank works to facilitate the formation and growth of such markets.

This bank is known as the “Guardian of the Money Market” because it is in charge of safeguarding the money market against various threats, not just structure, and development.

Question 11: Why is the Supply of Debt Decreased if Bank-Rate is Increased by Central Bank?

Answer: A portion of demand deposits held by listed banks must be deposited with the central bank. A bank rate change policy is a debt-control strategy that involves increasing or decreasing this part or rate.

If the bank rate rises, the listed banks will be required to deposit more of their deposits with the central bank than before.

 As a result, the amount of money they have in their possession decreases. This reduces lending capacity as well as credit supply in the market.

Question 12: What is the Influence of Open Market Operation Policy in Credit Control?

Answer: Suppose the central bank adopts a debt control strategy by buying and selling bills, bonds, securities, etc., in the open market. In that case, it is called the ‘open market’ policy.

If the central bank makes such a sale, the money from the market or commercial bank goes to the central bank.

This reduces the lending capacity of commercial banks and reduces the number of loans in the market.

On the other hand, if the central bank buys such bonds and securities, the supply of cash in the market increases. Which in turn increases the supply of credit in the market.

Question 13: How Does Bank Rate Policy Play a Role in Credit Control?

Answer: Exchange notes are the notes and coins issued by the central bank on behalf of the government.

Suppose everything in the market is in order. In that case, the interest rate of commercial banks in the market increases if the bank rate of the central bank increases.

This discourages consumers from borrowing. As a result, the amount of debt in the market decreases.

 On the other hand, when the central bank lowers the bank rate, the interest rate in the market goes down, which encourages the borrowers to take loans. As a result, the amount of debt in the market increases.

Question 14: What Scheduled or Listed Bank? What are the Features of a Scheduled Bank?

Answer: If a bank becomes a member of the central bank after committing to comply with the central bank’s orders, it is called a scheduled or listed bank.

The features of a scheduled bank are as follows:

  1. Listed bank refers to all the member banks of the central bank.
  2. The central bank is the guardian of the country’s currency market. Therefore, the banks included in this list are certainly considered honorary members of the country’s money market.
  3. All the listed banks have to be approved and registered under the prevailing banking laws of the country.
  4. Listed banks have a minimum paid-up capital and reserve funds.
  5. Each listed bank deposits a certain portion of its accumulated deposits with the central bank.
  6. Each listed bank buys a minimum portion of the deposit as bonds as per the rules prescribed by the central bank and reserves it as liquid assets.
  7. The listed banks developed a cooperative relationship with the central bank.
  8. Listed banks around the world have to follow the rules and regulations of the central bank.

Question 15: How does Central Bank Issue Notes?

Answer: In any country, the central bank is in charge of issuing and disseminating notes and currency. The Central Bank coordinates the supply of notes and currency to meet the country’s demands.

Money supply and currency are unquestionably regulated by this issue. There is a link between the number of notes issued and the country’s overall assets. In this situation, economic activity between the countries is taken into account.

Monetary contraction happens when the amount of notes issued is less than what is required. Transactions are hampered, investment is reduced, and unemployment rises.

Inflation occurs when the amount of notes issued exceeds the required amount. This raises the cost of goods on the market. It can harm the economy as well.

As a result, the central bank must maintain a balanced approach to note issuance. Various foreign rules and regulations must also be followed.

Question 16: What is meant by Credit Control of Central Bank?

Answer: Credit control refers to keeping the proper level of credit. Individuals and organizations attempt credit management on their own.

The central bank is in charge of managing the country’s total credit balance. As a result, the central bank’s attempts to manage the level of credit in the country as a whole are referred to as debt control.

 In the credit market, banks are a significant source of funding. When the supply is low, production is hampered. When supply rises again, inflation occurs.

Such debt management aims to avoid both of these scenarios while maintaining a sustainable level of debt in the market.

Question 17: What are the Techniques or Methods of Credit Control of Central Bank?

Answer: The techniques or methods of credit control of the central bank are as follows:

Quantitative Method:

  1. Bank Rate Policy
  2. Open Market Policy
  3. Reserve Ratio Changing Policy

Qualitative or Selective Methods:

  1. Rationing of Credit
  2. Consumer’s Credit Control
  3. Change in the Marginal Rate of security Credit
  4. Direct Action
  5. Moral Persuasion
  6. Policy of Publicity

Question 18: What is Bank Rate Policy?

Answer: The bank rate is the interest rate at which listed commercial banks borrow from the central bank or discount their first-class bills and securities to the central bank.

The bank rate policy is the central bank’s strategy for regulating debt by increasing or decreasing this rate. This is an essential and ancient method of quantitative credit management.

This approach of credit management was initially proposed by the Bank of England in 1839.

When there is an excess of credit in the money market, the central bank increases bank rates.

When the supply of credit in the market falls, and the economy slows, on the other hand, the central bank lowers the bank rate, balancing and controlling the amount of credit available in the market.

Question 19: What are the Limitations of the Bank Rate Policy?

Answer: The 4 important limitations of bank rate policy are as follows:

  1. Such a policy cannot be implemented without a well-organized money market in the country.
  2. If the commercial banks have additional reserve funds, then the banks do not approach the central bank for loans. As a result, this policy loses its effectiveness.
  3. If the interest rate rises in the market and the bank rate increase, then the policy may not be effective.
  4. If various agencies work in the market for lending outside the commercial banks, then the policy does not work.

Question 20: What is Open Market Policy?

Answer: In commercial terms, open market policy refers to the central bank’s purchasing and selling of bonds, securities, bills, shares, debentures, and other securities in the open market to aim for credit control.

Suppose there is an ample supply of money in the market. In that case, it is anticipated that money will flow around the commercial banks under such a policy.

The central bank uses an open market policy to control debt by manipulating the money supply situation by purchasing and selling bonds, securities, and other assets.

After 1914, this policy was implemented to assist the Bank of England’s Bank Rate Policy.

Question 21: What are the Limitations of Open Market Policy?

Answer: The 4 important limitations of open market policy are as follows:

  1. This policy cannot be implemented if the money market is not adequately organized. There is insufficient securities present, or they cannot be sold.
  2. This policy is not applicable if the money deposited by individuals or institutions is not a deposit in a commercial bank or if the individuals are not used to transacting through commercial banks.
  3. The central bank will not implement such a strategy by implementing a policy of easy lending to commercial banks.
  4. If commercial banks can obtain good loans from other sources, this approach may not be effective.

Question 22: What is Reserve Ratio Changing Policy?

Answer: In each country, listed commercial banks are required to deposit a portion of their total deposits with the central bank in the form of cash and liquid assets.

The cash deposit requirement is called the cash reserve requirement (CRR). The exchangeable liquid reserve rate is called the statutory liquidity ratio (SLR).

The strategy adopted by the central bank to control the number of loans in the country by raising or lowering such deposit rates is called the reserve ratio changing policy.

Question 23: How does Central Bank Supervise the Money Market?

Answer: The central bank supervises the money market in the following way:

  1. Preparing necessary plan
  2. Helping in the formation and development
  3. Helping in management
  4. Maintaining the stability of the money market
  5. Proper maintenance of money value
  6. Observing responsibilities as an agent

Question 24: What is a Clearing House?

Answer: A clearinghouse is the settlement of inter-banking debts arising from banking transactions.

In a broad sense, a clearinghouse is a system through which listed banks resort to the specific management of the central bank to settle their mutual debts and settle interbank debts under the supervision of the central bank.

In the modern banking system, the clearinghouse is a simple and innovative procedure operated by the central bank to settle inter-banking debts.

Its presence creates dynamism in banking functions, and its absence creates unpredictable embarrassment. So the invention of the clearinghouse is considered an impeccable creation in the banking world.

Question 25: What are the Features of Clearing House?

Answer: The features of a clearinghouse are as follows:

  1. This is the place for the settlement of inter-banking debts.
  2. It’s a technique for settling transactions daily.
  3. The central bank oversees and controls it.
  4. At the specified time, the member banks send here the details, including the proof and details of their debts, in the form of images. And
  5. Debits or credits the accounts of the Central Bank’s member banks using the electronic clearing mechanism to complete transactions.

Question 26: What is the Importance of Clearing House?

Answer: The importance of clearinghouse is as follows:

  1. Quick settlement of transactions
  2. Saves time
  3. Advantage of transaction
  4. Influence on the cash deposit of bank
  5. Assist with achieving economic goals
  6. Aids in the transfer of funds
  7. Economic Policy

Question 27: What is Rationing of Credit?

Answer: Rationing of credit is a policy that involves identifying a specific sector and increasing or decreasing the quantity of credit available.

The central bank directs specific allocations in the sectors where lending is required in such a policy.

It establishes constraints on the sectors where debt should be decreased once again. It is possible to regulate debt in certain industries in this way.

Question 28: What is Consumer Credit Control?

Answer: In the current world, there are numerous lending options for the purchase of consumer items.

In the consumer goods purchasing industry, the consumer credit control system is the strategy for maintaining the target amount of debt.

Because consumers loans are repaid in installments. It is easy to sway the consumer and keep the debt under control by reducing or increasing the number of loan installments or lending on the purchase price.

Question 29: When do Inflation and Deflation Occur?

Answer: Inflation occurs when the supply of money in a country increases when everything is in order. At the same time, deflation occurs when the supply of money in a country decreases when everything is in order.

Question 30: What are Statutory Liquidity Ratio (SLR) and Cash Reserve Requirement (CRR)?

Answer: The statutory liquidity ratio (SLR) is the amount of money that listed banks must buy and deposit in the central bank by purchasing treasury bills.

A cash reserve requirement (CRR) is a requirement that requires listed banks to deposit a part of their collected deposits in cash with the Central Bank.

I hope that by the end of this post, you have a good understanding of the “central bank” chapter. If you have any doubts or questions, don’t hesitate to contact us or leave a comment so that we can respond soon.

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